Improving Australia's regulatory framework for systemic financial stability

Regulatory theory since the global financial crisis (GFC) has emphasised the importance of systemic financial stability as a regulatory objective. This has taken the place of pre-GFC reliance on private markets as a primary mechanism to avoid systemic risk combined with a laissez faire approach to public oversight that focused primarily on ensuring the safety and soundness of a predefined number of financial institutions. Several jurisdictions, including the UK, have engaged in significant reform of their financial infrastructure to facilitate regulation in accordance with this change in regulatory theory, including through the creation of financial stability authorities. Importantly, these reforms have provided clarity in regulatory mandate and placed systemic financial stability at the centre of the regulatory framework. Australian policy-makers and regulators have been less open to engage in similar reforms, arguing that the existing framework is effective. This article argues that there are a number of areas where the Australian approach could be enhanced by regulation that has at its core the promotion of systemic financial stability.